The Markets
Market opening: Markets are likely to open flat today. FTSE 100 futures were trading 0.90 points down at 7:00 am.
New York: Wall Street ended in the red following disappointing corporate earnings. Persistent slide in oil prices further dampened investor sentiment. The S&P 500 declined 0.8%, with healthcare stocks losing the most.
Asia: Equities are trading higher amid improvement in the Chinese market and expectations of government measures to stabilise the market. Meanwhile, investors are awaiting data on US non-farm payrolls to be released later today. The Nikkei 225 added 0.3%, while the Hang Seng was trading 0.9% up at 7:00 am.
Continental Europe: Markets ended lower as commodity prices fell sharply and Bank of England upheld its interest rate. Uncertainty over the Fed’s rate hike added to investor concerns. France’s CAC 40 and Germany’s DAX shed 0.4% and 0.1%, respectively.
Crude Oil: Yesterday, prices of WTI and Brent Crude Oil declined 1.1% and 0.1%, respectively. The spread between the two varieties stood at US$4.9 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.47% lower yesterday at 752.56. To read our latest research click here.
Today’s news
Bank of England keeps bank rate unchanged
The Monetary Policy Committee of the Bank of England (BoE) retained its benchmark interest rate at 0.5%, with an 8-1 vote in favour of maintaining rates. The reading has been unchanged since March 2009, and matched market expectations.
UK growth rate stable for three months to July: NIESR
According to National Institute of Economic and Social Research (NIESR), the UK’s GDP expanded 0.7% for the three months to July 2015, following similar expansion in the three months ended June. On y-o-y basis, the economy grew 2.7%.
Company News
Red Leopard Holdings (LON:RLH) – Speculative Buy
Yesterday, Red Leopard Holdings announced that it has raised £175,000 gross through the placement of 175 million ordinary shares at 0.1p each. The subscribers would also be entitled to 1.5 warrants for every one share subscribed for, to further subscribe for shares at 0.1p each. These warrants would be valid for a period of three years. Besides additional working capital, the net proceeds of the placement are to be used to access and clear the Idora Tunnel for exploration purposes involving mining activities in and around Shoshone County, Idaho. Furthermore, the company is likely to convert all £20,000 of its convertible loan notes into 20,000,000 ordinary Shares at 0.1p following a request from City & Westminster Corporate Finance LLP. Thereafter, Red Leopard will not have convertible loan notes outstanding and City and Westminster shall hold 3.57% equity stake with voting rights in the company’s issued share capital. Moreover, the directors too shall subscribe for a total of 131,458,333 Ordinary Shares in the company at the same price as quoted above to fulfil their accrued salaries and fees obligation from the last eighteen months. All in all, the company will apply for a total of 326,458,333 new ordinary shares to be admitted to AIM for trading, which is expected to commence from 19th August 2015.
Our view: Red Leopard which is an Investing company focused on the natural resources sector, and in particular, precious metals intend to raise funds for seamless operations at its Shoshone County prospect. Recently, the company had faced some issues at the Idora Tunnel that increased the costs by as much as 50% and the company needed additional funding to carry out the necessary work in the winter conditions. With the successful fundraising, the company is in a comfortable position to steer the project ahead. Moreover, the strategy is line with its plans to capitalise on value adding investments acquisitions that are likely to benefit shareholders. The placement shall enable the company to advance further in its expeditious efforts. We, thus upgrade the stock to a Speculative Buy.
Beaufort Securities acts as corporate broker to Red Leopard Holdings plc
Old Mutual (LON:OML) – Buy
Old Mutual announced its interim results for the six-months ended 30th June 2015. Gross sales for the company rose 25% y-o-y to £15.6bn in constant currency and funds under management were up 7% to £335.7bn Adjusted operating profit (AOP) grew 20% year-over-year to £904m in constant currency and 19% in reported currency. The core operations witnessed tremendous growth with double digit growth across business units. Adjusted operating profit for Old Mutual Emerging markets rose 14% y-o-y as a result of higher asset based fees, good risk experience, and an improved performance from Mutual & Federal. Nedbank’s AOP recorded a 12% increase y-o-y due to strong non-interest revenue growth, disciplined expenses, ongoing improvement in impairments and faster growth in the rest of Africa. Adjusted operating profit for Old Mutual wealth soared 26% y-o-y to £151m including profits from European divestments after excluding contribution from Quilter Cheviot. The net client cash flow (NCCF) for this unit was 92% higher vis-a-vis the previous period with robust growth in its UK and International businesses. For the Institutional Asset Management unit, AOP surged 24% to £83m including an exceptional performance fee. NCCF for this unit was underpinned by sales in equities of international and emerging markets, and real estate classes. Annualised Group return on equity was reported at 15%, meeting targets primarily driven by growth in profits and a favourable impact of a weaker Rand. The company was able to achieve this against a weak economy of South Africa battling power failures and low GDP growth which continue to pressurise the rand and the interest rate, and a volatile equity market.
Our view: Old Mutual’s profits grew vigorously in the six months with notable growth across all its business units. With an enhanced customer focus approach including offering a broad and innovative product suite with competitive pricing, Old Mutual expects the business in South Africa to be stable and perform well despite a challenging environment characterised by power shortages and upward interest rate cycle. With strong growth prospects in UK driven by the appropriate business model, the company is likely to generate profits. Furthermore, the company is confident of capitalising on new opportunities across the US by developing capabilities in new asset classes through its global distribution initiative and value enhancing acquisitions. Thus, in view of the above, we reiterate a Buy rating on the stock.
EasyJet (LON:EZJ) – Buy
Yesterday, EasyJet released its passenger statistics for the month of July 2015. The passenger traffic increased 9.4% y-o-y to 7,036,470 and the load factor improved 1.4 percentage points to 94.3%. On a rolling basis for the 12 months, the number of passengers increased 6.1% to 67,710,099 and the load factor improved 1.2 percentage points to 91.4%.
Our view: EasyJet continues to lead the airline market with highest load factor for the month of July. The company delivered on its strategy of easy and affordable travel as is evident from the strong passenger numbers growth. EasyJet plans to expand its services by increasing its flight offerings. Recently, several strategic routes were launched including Vienna and Basel that are expected to carry 78,000 passengers annually. The company expects to launch five more routes across different countries, later this year. Further it is well placed to benefit from low level of jet fuel prices, with an expected decrease in fuel bill between £60-85 million in the second half of the year. Therefore, in view of the rapid expansion and likely reduction in costs, we give a Buy rating to EasyJet.
Yesterday, Rio Tinto declared its half yearly results for the six months ended 30th June 2015. During the period, the company’s consolidated revenues reduced to US$18bn from US$24.4bn, primarily due to the drop in commodity prices. The company’s Copper and Coal division’s underlying earnings fell 40% to US$393m. However, the revenues from Aluminium division advanced to US$793m, 113% higher as compared to H1 2014 owing to reduced costs, improved productivity, and weaker Australian and Canadian currencies. During the period, the company’s underlying earnings fell to US$2.9bn, US$2.2bn lower than H1 2014, and the net earnings slumped 82% to US$0.8bn leading to a lower EPS of 43.8cents against 238.2cents in H1 2014. The decrease in earnings is attributed to non-cash exchange rate and derivative losses of US$1.3bn, impairment charges of US$0.4bn, legacy remediation costs of US$0.2bn and general restructuring among others. Rio’s net cash flow from operating activities stood at US$4.4bn, 19% lower than H1 2014 and a reduction in capital expenditure by US$1.4bn to US$2.5bn. The company’s net debt advanced to US$13.7bn in H1 2015, resulting in a net gearing of 21%. On the operational front, Rio completed on key aspects of the 360 Mt/a infrastructure expansion in Pilbara and plans to use the setup to full capacity and generate maximum output from the system. Further, about 40Mt/a of low cost brownfield expansions at West Angelas, Nammuldi, Yandicoogina and Brockman mines, were finished in the H1 2015, with an average mine production capital cost of about US$9 per tonne. The company returned US$3.2bn to shareholders in H1 2015 along US$1bn of share buybacks. Rio also declared an interim dividend per share of 107.5 cents to be paid on 10th September 2015.
Our view: Rio Tinto delivered a resilient performance in face of the challenging market conditions. Various cost cutting measures were undertaken to enhance operations and trading working capital was strictly managed to reduce costs. The company has plans to decrease its capital spending over the next two years. Rio continued to improve shareholder value and has also declared interim dividends in spite of the drop in earnings. Going ahead, Rio plans to generate output from the Silvergrass iron ore mine in the Pilbara, South of Embley project near Weipa and expansion of the Oyu Tolgoi in Mongolia. Overall, the company is financially well placed and adequately equipped with resources to face the tough situations ahead and maintain its position in the market. In view of the above argument, we maintain a Buy on the stock.
Yesterday, Aggreko released its half yearly results for the six months ended 30th June 2015. During the period, the company’s revenues improved 2% to £781m aided by successful delivery of the inaugural European Games. The company’s revenues excluding fuel improved 1% to £752m while on an underlying basis, the overall revenues declined 2%. Revenues from the Power Projects dropped 9% owing to pricing issues in Bangladesh and lower utilisation on Panama contract. The company’s trading profit reduced 18% to £114m and the pre-tax profit slipped 21% to £102m. Consequently, the company’s diluted earnings per share declined 19% to 29.63p per share. In view of the current trading conditions, the company reduced its capital expenditure plans to £270m from £300m and plans to save costs up to £80m from margins and returns by 2017. On the other hand, the company’s order intake for the period stood at 451MW, with the order book reflecting extensions in Argentina, Ivory Coast, Bangladesh and the first 115MW in Mozambique. In view of the persistent challenges, the company expects its profit to be in the range of £250m and £270m for the full year. Aggreko maintained its interim dividend at 9.38p, in line with the previous year.
Our view: The performance of the company in the first half was impacted by difficult trading conditions in a number of markets, most prominently in Bangladesh. In addition, external factors, including reduced oil price and ongoing security concerns in Yemen, hurt Aggreko’s business prospects. The company is moving towards a new organisational structure to address these markets and improve its operational efficiency. The company has warned of another tough year even as it prepares to cut costs to tame the slide in its profits. We would like to wait and watch the impact of the structural changes to the company’s bottom line in the medium term and therefore retain a Hold rating on the stocks.
Yesterday, Aviva released its half yearly results for the six months ended 30th June 2015. The company’s operating profit stood at £1,170m, up 9% y-o-y as the underlying growth and Friends Life contribution more than offset adverse currency movements and disposals. Contributions from the life, health and general insurance business was positive but the fund management business performed poorly. The value of the new business (VNB) increased 25% to 534m owing to a huge jump in the UK and Ireland business (42%) followed by Asia (18%). UK Life VNB was up 43% to £253m; +31% higher excluding Friends UK. The company achieved synergies of £63m in the first three months of Friends Life integration and remains on track to deliver its synergy target of £225m. In additional the company plans to transfer £22.3bn of assets under management to Aviva Investors and rationalise its property by reducing its UK footprint by 33% in FY 2016. The company’s cash flow fell to £495 million from £623m, Also, Aggreko increased its interim dividend to 6.75p, up 15% y-o-y.
Our view: After three years of turnaround initiatives and the Friends Life integration, the company looks in good shape. Aviva’s balance sheet has improved and the company now enters its transformation stage. The British insurer’s operating profit has grown well for the period and the synergetic benefits from the integration have progressed well. The company has declared a hike in dividend that augurs well for its future prospects. However, the integration with Friends is still in the initial stages and the company’s’ operating profit was steady without the impact this acquisition. Hence we would like to wait in order to assess the future growth trajectory of the company and therefore maintain our Hold on the stock.
Economic News
Germany factory orders
German factory orders increased 2.0% m-o-m in June, after a revised decrease of 0.3% in May, said the Federal Ministry of Economy and Technology. Economists had forecasted orders to improve by 0.3%. On y-o-y basis, workday-adjusted factory orders advanced 7.2% after a revised decline of 4.5% in May. The economists had forecasted a rise of 5.2%.
UK industrial production
UK industrial production dipped 0.4% m-o-m in June, after improving 0.3% in May, the Office for National Statistics reported yesterday. Markets had forecasted an improvement of 0.1% for the month. On y-o-y basis, growth in industrial production grew 1.5% in June, from a revised 1.9% in May. The economists had forecasted a rise of 2.2%.
UK manufacturing production
The Office for National Statistics reported that the UK manufacturing output rose 0.2% m-o-m in June after decreasing 0.6% in May. The reading was above the market expectations of a 0.1% rise. On y-o-y basis, manufacturing output expanded 0.5%, after registering a growth of 1.0% in May. The economists had forecasted a 0.4% improvement.
US initial jobless claims
Number of Americans filing their first initial claims for unemployment benefits rose by 3,000 to a seasonally adjusted 270,000 in the week ended 1st August, from last week’s unrevised figure of 267,000 the Labor Department said yesterday. Economists had expected claims to increase to 272,000.